The French Election & US Mortgage Rates

With a win by the socialist party in France’s presidential election, bond investors will be shifting money into U.S., U.K. and Germany. That means lower mortgage rates, at least temporarily, for U.S. consumers.

The 10-year borrowing rate for German bonds fell and now stands at 1.58%. By contrast, the French government has to pay a 2.78% interest rate. The comparable U.S. and U.K. borrowing rates are 1.86% and 2.00%, respectively.

With the new socialist president at the helm, the retirement age will be lowered to 60 for all and the top income tax rate could reach 75%, if campaign promises are kept. A relaxed approach is what French citizens evidently desire, but fewer people working will mean more debt accrued to the already high French budget deficit, thereby pushing French government borrowing rates higher compared to other countries.

Some of the money flowing out of France will go across the Rhine to Germany. Because Germany implemented a higher retirement age a few years ago, more people are working and its budget situation has improved. The bond investors simply trust Germany much more than France in the ability to repay the borrowed money.

Greece meanwhile has to pay 22% interest to borrow. Investors lending to Greece at this high interest rate will probably come up empty as Greece defaults. Even the back street loan sharks are afraid to lend to Greece. Given Greece is a democracy and given that more than half of its workers are employed by the government, there is little likelihood of government pension cuts or of raising the retirement age to that of Germany’s.

Singapore, meanwhile, is able to borrow as cheaply as Germany. Known for its exceptionally clean streets and good dim sum, this former city of the British Empire was made into a world-class city-state by peasant immigrants from southern Chinese provinces just a few generations back. This illustrates the ability of previously poor people to quickly rise to the top provided the citizens are willing to work hard and are not compelled to retire early. Furthermore, people work hard because Singapore goes to great lengths to emphasize its respect for private property rights.

Regarding America, the uncertainty related to Eurozone economies (outside of Germany) has brought money into U.S. bonds. Mortgage rates, which follow the pattern of U.S. government borrowing rate, will stay quite low for the time being.

Lawrence Yun is Chief Economist and Senior Vice President of Research at NAR. He directs research activity for the association and regularly provides commentary on real estate market trends for its 1 million REALTOR® members.